Tapping into the informal economy

Experience gathered while working as a salesperson shed light on the mode of operation of businesses that are classified as informal. Interactions with these entities were often riddled with out of the norm characteristics, an aspect that was key to their survival. Due to the fact that the ability to sustain businesses of such a nature is highly dependent on a mode of operation that infringes on the principles of formal business, it did not come as a surprise when I was exposed to business practices that would be otherwise not fall under the scope of formal business operation, but which were a determination of how well they performed.

(Image source: https://coinpedia.org)

A common mode of operation that I was exposed to revolved around distribution businesses which only had one registered business for the purpose of legal conformity but had at least five other branches that operated informally, in that they were outlets that were drop off and collection points for their clients. In these predominantly rural markets, the subsidiary outlets were preferred due to the discounted rates that they offered that were mainly enabled by the volume of products that they pushed out into their wide market reach.

Ideally, the amount of revenue that could be collected from these by the respective county governments vis a vis the payments that they make to the county authorities pale in comparison. Which begs the question, why do businesses that generate so much revenue choose to remain under the radar in this sense? Beyond sealing such loopholes that rob county governments of crucial revenue, it is of the essence for a business environment to exist whereby levies and taxes charged match service delivery by governments to businesses.

When referring to service delivery, key issues that constantly came up included the physical business environment revolving around matters that deal with sanitation and security, repetitional levies charged across different counties as well as market infrastructure challenges such as proper road networks that enhance market access. These are crucial to building links with an informal sector that is highly undervalued and under rated, considering that as per statistics from the Kenyan Economic Survey 2018 released by the Kenya National Bureau of Statistics (KNBS), the sector accounts for 83% of employed Kenyans.

There are key systemic issues that need to be addressed, as they are in the most part responsible for businesses being considered too risky for financial institutions, while at the same time being a reason as to why they thrive. The lack of a financial track record hugely facilitates their being off the radar of government authorities. Also, the issue of collateral is a stumbling block for small businesses that are run by women, due to a discriminant property rights and inheritance system.

In a bid to improve livelihoods and reduce poverty rates in the country, tapping into the positive aspects of the ecosystem that is the informal sector will go a long way in achieving this goal. Issues that deal with business practices that enhance their viability for access to finance such as proper bookkeeping, ancient legal rights as well as the availability and access to health insurance options are vital for strategic growth of the sector.

litualex@gmail.com

Informal Economy Analyst.

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A sales person’s perspective to approaching informal markets

In my experience working as a sales person for different multinational companies in Kenya that dealt in fast moving consumer goods (FMCG), there are valuable lessons that I learnt in as far as sales and marketing is concerned. Different market segments respond differently to execution strategies. Understanding the demographic qualities of your target audience is key to determining the approach to be used.

(Image source: http://cdn.24.co.za)

Given that I was often tasked with pioneering the introduction of certain products to rural markets in Kenya, it became paramount as time went by that I had to be innovative in my approach if I was going to succeed. This was a tough lesson as even the market segmentation strategies that I had been previously exposed to bore little fruit. Most of these looked good on paper but failed miserably upon their execution and deployment.

The most important lesson was that building relationships with the business owners and staff determined how well the product performed in informal retail markets. What came out clearly was the importance of the business owner to eventually perceive the sales person as a value add to their business. By this I mean that winning their trust to the point where they saw me as a manager of their business and consulted on matters regarding the adoption of business strategies was a game changer. The staff are a key element in this equation because they are the interface between your product and the customer.

Another strategy that worked well was tapping into the distribution networks that exist within these informal markets. Given the limited resources in terms of market coverage, establishing networks with smaller distributors within these markets and linking them with the established distributors emerged as a win-win situation. By going the extra mile to make initial visits to the smaller distributors and establishing and fostering linkages with the larger distributors through the negotiation of better profit margins for them broadened the market reach of the products I was selling.

Also, promotional materials that were provided by these companies are more valued in rural markets than urban ones. Leveraging these beyond the customer in these markets goes a long way in cementing brand royalty. As alluded to earlier, if successfully brought on board, the staff of small businesses will be key product ambassadors in a way that is cost effective for the company. A good example is that of providing them with tee shirts which they can use as uniforms. This enhances the strategic brand’s visibility and presence in those markets especially if it is coupled with product activations.

It would be wrong for me to paint a rosy picture of the gains made without pointing out some critical aspects that hampered the gains. It is with this in mind that the issue of risk management comes to mind. Multinational companies that are looking to make headway into African markets that are dominated by a huge informal sector need to factor in the risk angle into their operational budgets. This will help them mitigate some of the setbacks that are experienced while establishing market presence such as cases of business closure, poorly coordinated government policy; both at national and county level and the menace that is corruption.

litualex@gmail.com

Informal Economy Analyst  

Addressing Informality

The report “Women and Men in the Informal Economy” by the International Labour Organization (ILO) states that informal employment is the main source of employment in Africa, accounting for 85.8 percent of all employment, or 71.9 percent, excluding agriculture. Further, their research points out that 92.4 percent of all economic units in Africa are informal. An even more staggering statistic from the report is that 97.9 percent of the agricultural sector on the continent is informal.

(Image source: https://www.redpepper.org.uk)

The growth in the size of the informal economy should send a signal to policy makers that therein lies an untapped opportunity in as far as reaping mutual economic benefits. By this, I mean that due to the fact that in Kenya this sector of the economy contributes about 83% of employment demographic outside agriculture and yet only accounts for about 30% of the country’s GDP. This indicates that there is a gap that could be exploited. Some of the factors that inform this scenario revolve around issues such as the low levels of productivity as well as profitability in the sector. On the other hand, there has been an increased push to try and unlock issues that the sector grapples with such as access to finance, which has been a key factor that inhibits them from scaling their operations.

In an effort to make informal businesses profitable entities that can increasingly feed into formal business value chains as well as reduce their high-risk profile to financial institutions that they approach for credit, there are a couple of points that need to be taken into mind. The first and foremost is that of ensuring that small businesses develop the internal structures that can be used to measure their operations. These include proper financial records through book keeping which involves maintaining well structured and up to date records of accounts and financial transactions. This will enable them to not only be in a better position when applying for credit, but also ensure that they absorb these funds for purposes that will help them to scale up.

On the issue of productivity, beyond access to finance are factors such as the level of skills and access to markets. In most cases, businesses in the sector are set up not as a first option but as a last resort and a means of survival. A good example is that of businesses that are set by people who cannot access the shrinking formal employment opportunities and thus pursue the option of setting up a business in an attempt to cater for their expenses. Such entrepreneurs usually do not posses the skills required to venture into the various business fields that they find themselves in. It is not surprising that most of these entities close shop within two to three years of operation.

Access to markets is a hindrance to the productivity of some informal businesses in the sense that it limits the output of their goods in instances where ready markets are not available. In the case of small scale farmers, a lack of markets for their produce makes them scale back on their production due to their inability to absorb the shock that comes from losses from wasted produce. Most opt to take the route of subsistence farming. Linked to this is the fact that most have to grapple with inadequate storage facilities that could mitigate such losses.

It is therefore prudent and timely for policy makers to implement a strategy that addresses the issue of informality as a priority. This will not only enable governments to comfortably widen their revenue source while, but also improve the livelihoods of people who are struggling to make a living.

litualex@gmail.com

Informal Economy Analyst.

Jobless Growth in Africa

Despite the fact that East Africa remains the fastest-growing sub-region in Africa with an estimated growth of 5.6 percent in 2017, up from 4.9 percent in 2016, it still grapples with low job growth rates. The African Economic Outlook 2018 by the African Development Bank Group (AFDB) further notes that it is imperative for sustained economic growth to create jobs which positively impact poverty reduction and lead to more inclusive growth.

(Source: https://www.afdb.org)

According to the report, the combination of high economic growth and low job creation has given rise to the claim that Africa is experiencing jobless growth. The findings of the document point to the fact that in the last decade, faster-growing countries in Africa actually generated fewer jobs than countries that grew more slowly. The slow job growth has mainly affected two demographic groups; women and youth aged between 15 to 24 years. Estimates of African population data indicate that it had 226 million youth in 2015, a figure projected to increase 42 percent, to 321 million by 2030. Its labour force is also projected to rise from 620 million in 2013 to nearly 2 billion in 2063.

In an effort to sustainably reduce poverty, economies must create more productive jobs, which are better remunerated and better-quality jobs. For this to happen, AFDB recommends that countries engage in structural transformation, which is a process whereby capital and labour is shifted away from low-productivity sectors toward higher-productivity sectors.

Structural transformation has encountered slow implementation due to a couple of reasons. First, the agricultural sector remains the dominant source of jobs in Africa, accounting for about 51 percent of employment in these countries, most of it in subsistence agriculture. The document highlights that almost 84 percent of Africa’s poverty is a result of employment in agriculture and services sectors. Second, the shift to manufacturing has been focused toward a comparatively small sector, which has the third-lowest relative productivity level after agriculture and services. Also, the labour resources that left agriculture have shifted toward wholesale and retail trade, much of which is characterized by low-productive informal activities.

As per findings of the report, the informal sector remains a key source of employment in most African countries, accounting for approximately 70 percent of jobs in Sub Saharan Africa and 62 percent in North Africa, with 93 percent of all job growth in Africa in the 1990s being accredited to the informal sector. The last factor that has slowed down the implementation of structural transformation is the fact that the public sector has generally been the main source of higher-paying formal sector jobs in many African countries. Fiscal constraints and demographic change have combined to limit the future scope of the public sector as a driver of formal sector employment growth.

One key policy recommendation that was proposed on the way forward as a priority for African governments is to encourage and embrace a shift toward labour-absorbing growth paths. In this sense, they should put in place programs and policies aimed at modernizing the agricultural sector, which employs most of the population and is typically the main step toward industrialization. A second priority is to invest in human capital, particularly in the entrepreneurial skills of youth, in an effort to facilitate the transition to higher-productivity modern sectors.

In as far as reversing the fortunes of the manufacturing sector, it is proposed that emphasis should be placed on light manufacturing, which is typically considered key to job creation in Africa. Doing so requires developing export capacity, given the continents small domestic markets. The interrelated nature of agriculture and manufacturing is crucial to achieving job creation as both are labour intensive. In the highly heterogeneous service sector, the way forward is to develop modern services while improving the productivity of informal activities.

Seeing as informality is a key component of African labour markets in that it accounts for an estimated 50–80 percent of GDP, 60–80 percent of employment, and up to 90 percent of new jobs on a continent where more than 60 percent of the population performs low-paid informal jobs, policy makers should avoid burying their heads in the sand and recognize the diversity and importance of the sector as a profitable activity that may contribute to economic development and growth.

litualex@gmail.com

Informal Economy Analyst.

Improving Informal Business

The past decade has been characterised by the gradual growth of informal businesses in the sub Saharan region. A global research-policy network, Women in Informal Employment: Globalizing and Organizing (WIEGO), states that regional estimates of the size of the informal sector provide a useful overview, but they hide the diversity that exists within a region.

In Sub-Saharan Africa for example, informal employment tends to account for a smaller share of non-agricultural employment in southern Africa (33 per cent in South Africa and 44 per cent in Namibia) relative to countries in other sub-regions (82 per cent in Mali and 76 per cent in Tanzania). Some of the factors that have accelerated this growth include the rapid rate of urbanisation, a decrease in the number of formal employment opportunities as well as increased rates of poverty.

(Source: https://i.guim.co.uk)

While it may be argued that informal businesses provide a source of living for many families that would have otherwise been struggling to get by, the jobs that exist therein are poor quality ones. This is due to the fact that jobs in this sector of the economy do not offer any health or terminal benefits, as most operate on a wage-based model. Also, the conditions under which most operate are not conducive for the generation of business opportunities that may enable them to scale. For those that are involved in manual labour, a vast majority are exposed to highly risky environments as they do not have the requisite protective gear that would help them avoid work related injuries. Another common factor of businesses in the sector is their low level of productivity.

Policy makers have suggested various interventions for the sector that would see the improvement of informal businesses in a way that increases their incomes and offers some sort of decency to the lives of those engaged in businesses in the sector. One of the proposals that has been put forward is that of formalising informal businesses. It is often seen as a positive intervention from the perspective that it would not only make these enterprises more profitable, but also increase the tax base of a government, given the expansive nature of the sector.

One of the reasons that discourage informal businesses from formalising is the cost that comes with formalisation. Once they are formal, businesses are required to obtain certain licences as well as adhere to health and safety standards, all of which have a higher price tag than the cess fees that they are accustomed to paying. This aspect would naturally require such businesses to factor in these costs to their goods and services. An increase in pricing generally means that they would lose out on a certain percentage of their clientele who were accustomed to the lower prices.

Furthermore, given that the clientele of these enterprises mainly consists of low income households, the reality of a reduction in their base support system due to an increase in pricing makes the formalisation narrative a hard sell. A conundrum exists in the sense that on one hand, these businesses would like to grow to become more profitable entities while at the same time wanting to maintain their existing customer base. On the other hand, most of them would prefer to remain under the radar of the authorities in a way that minimises the taxes that they would have to pay and extra costs that accompany formalisation.

As it stands, most informal businesses are yet to be convinced that they will benefit from formalizing. When selling the formalisation narrative, policy makers and authorities need to better articulate the benefits that come with formalisation for informal businesses. This should be accompanied with interventions that enhance their business management capabilities, skills upgrading as well as increased access to finance as a precursor to formalization.

litualex@gmail.com

Informal Economy Analyst.

The Significance of Investing in the Young Population

The Kenya Economic Report 2015 whose theme is ‘Empowering Youth through Decent and Productive Employment’ released by the Kenya Institute for Public Policy Research and Analysis (KIPPRA) is timely as it provides an indepth look at youth empowerment with a major focus on employment. The youth account for about 6o% of the labour force in the country, which is estimated to be growing at a rate of 2.9% per annum. According to the report, Kenya’s median age is estimated at 19 years and the proportion of the population that is below 15 years is estimated at 43%. Further, 78% of the population is aged below 35 years.

(Source: http://www.theeastafrican.co.ke)

A big challenge facing most youth is the lack of decent and quality jobs; almost three out of every four youth are engaged in the informal economy, traditional agriculture and pastoralist activities. The share of employment in the informal sector in total employment, excluding traditional agriculture and pastoralist activities, increased from about 17.1% in 1983-1987 to 82.7% in 2013/14. This significant increase in the informalization of employment can be attributed to a shrink in formal employment opportunities over the years. As is the case in most parts of sub Saharan Africa, most entrepreneurs opt to venture into informal business as a last resort for it is often the only way they can earn a living.

With Kenya’s median population age being below 20 years of age, in order to arrest the rapidly growing rates of unemployment that have seen a spike in the growth of entrepreneurial informality, the report calls for the development and implementation of employment creation policies and strategies to that will engage this demographic group. Some of the suggestions include investment in productivity enhancement skills, and quality job creation in fast growing and labour-intensive sectors such as services, agriculture and industry, while promoting the manufacture of export goods for the regional and international markets.

Given that about 88 per cent of manufacturing sector employment is in the informal sector, potential interventions in the sector would be a good place to begin. As is the norm, jobs in the informal sector are characterized by low wages and a general lack of social security benefits. In this sense, the quality of jobs provided by the sector are of poor quality. Also, due to the reason that informality is driven by incentives to minimize tax and compliance costs as well as other external factors such as challenges to access of credit, the report suggests that in order to create quality jobs, policy making should mitigate some of the constraints limiting their transformation to formal enterprises.

It is interesting to note that the report also indicates that Kenyan micro, small and medium sized enterprises (MSMEs) in manufacturing represent over 60% of establishments and account for 29% of those employed in manufacturing. The breakdown of MSMEs involved in manufacturing according to the 2016 MSME Report by the Kenya National Bureau of Statistics (KNBS) is 95% as micro, 3.8% as small and 1.2% as medium sized enterprises. The sector was ranked as the highest contributor accounting for 24.3% of MSMEs gross value added. At publication of this report, this figure stood at 11.7% of gross value added. This represents a 12.6% increase over a two-year period. The significance of ingraining a value addition angle into the manufacturing processes of MSMEs cannot be overstated as it will ensure that manufacturers in this sector of the economy not only reap the benefits of fetching higher market prices for their products, but also enhance the growth of robust value chains that are essential to the successful implementation of national industrialization plans. As is the case with most informal enterprises, firms grapple with issues that include limited access to technology as well as limited research and development activity.

It is clear that tackling the challenges posed by informality is a key to providing a sustainable solution to youth unemployment in the country. Focusing on aspects that improve their productivity such as upskilling, increased access to technology as well as investing in research and development processes will enable those that are engaged in manufacturing to venture into value addition for their products. The trickle-down benefits of implementing policies that are centred around overcoming the aforementioned challenges will be an investment in this country’s future.

litualex@gmail.com

Informal Economy Analyst.

 

Comparative Analysis of Informal Economy in Nigeria and Kenya

The Informal Sector in Nigeria and its Impact on Development is a book by Stephanie Itimi which is based on research on the informal sector in Nigeria. It focuses on three key areas namely employment, gender equality and tax evasion. Employment is looked at from the angle of the effect that the informal sector has on job creation. Gender equality merges with employment and is looked into by examining the role that the latter plays in empowering women financially. The author also provides an analysis of the complex relationship between the informal sector and the principle of tax evasion. This article aims at providing a comparative analysis of the informal sector in Nigeria and Kenya, based on the findings of the book, as well as those from research conducted on the Kenyan informal sector.

(Source: https://images-eu.ssl-images-amazon.com)

In Nigeria, the informal sector accounts an estimate of 70% of the total industrial employment. The country has the largest informal sector on the continent, which is enhanced by its population size as well as high levels of poverty. The Federal Office of Statistics (FOS) states that the informal sector creates 25,000 to 35,000 jobs each year. However, although this is highlights the job creation role of the informal sector, the author argues that with a country of 153.9 million people, the impact of the informal sector on unemployment is quite insignificant.

The Kenya Economic Survey 2017 indicates that the total number of new jobs created in the economy was 832.9 thousand. Of these, 85.6 thousand were in the formal sector while 747.3 thousand were created in the informal sector. The share of new jobs created in the informal economy represents a 5.9% growth from 83% recorded the previous year to 89.7%, or 13.3 million people. Nigeria outweighs Kenya’s working population by 66.33 million, however the significant gap is not reflected in the differences in the number of people in the informal sector between Nigeria and Kenya. This is due to Kenya having 89.7% of its working population in the informal sector, while Nigeria has only 34.6% of its working population in the informal sector.

In her book, Stephanie points out that the percentage of women in the informal sector of any economy is high, especially in developing and transition economies by referencing an ILO report which found that 46% of the informal sector in urban Nigeria was dominated by women. She states that the informal sector is seen as a major source of employment for women due to its suitability to their needs. The Micro Small and Medium Sized Enterprises Report 2016, released by the Kenya national Bureau of Statistics (KNBS), indicates that 32.2% of licenced establishments were owned by women, while 60.7% of unlicenced establishments were also owned by women. According to Bitange Ndemo, an associate professor at the University of Nairobi, these statistics mirror a global trend whereby women are over represented in the informal economy; a factor that is largely driven by survival, rather than the exploitation of an entrepreneurial opportunity. In terms of financing informal business, he argues that the problem faced is more of the cost of finance rather than it’s access.

On tax evasion as regards informality in Nigeria, the author notes that research has shown that there is a positive correlation between a rise in taxation and a rise in tax evasion, concluding it as a motivational factor for people migrating from the formal to the informal sector. However, factors such as an increase in tax evasion punishments such as heavy fines and prison sentences reduced the likelihood of people participating in the informal sector. Informal Sector and Taxation in Kenya is a publication by the Institute of Economic Affairs (IEA) that stresses the significance role that the informal sector can play in the quest to expand the tax base, noting that the intention of bringing the informal sector into the tax net is to facilitate the transition of these businesses to the formal sector and reduce barriers for all businesses. The paper shows that by extending the tax net to the informal sector, for example in the year 2008, the Kenyan government could have increased the tax base by approximately 7.66 percentage points, translating to revenue worth Kshs.79.3 billion.

In conclusion, as is the case in as far as data on the informal sector is concerned, the author indicates that one of the biggest impediments encountered during her research is its limitation which involved the omission of data in some years and unavailability of up to date research. To this end, she proposes that primary research should be conducted in to have a more up to date and realistic perspective on the topic. The part the informal sector plays in enhancing gender equality is restricted on just income, as female participants are able to easily obtain employment in the informal sector and adapt their job rule to their social and culture gender obligations. Also, government agencies should move from harsh approaches such as destroying informal market areas and increasing tax evasion punishments to more liberal approaches that empowers the activities of the informal sector through the provision of a conducive environment and inclusive policies which enhances productivity within the sector and enables taxation.

litualex@gmail.com

Informal Economy Analyst